High borrowing and local government intervention blamed for Chinese private companies' mounting debt

By Xie Jun Source:Global Times Published: 2017/6/11 17:38:39

Private companies increase bankruptcy risk

Unfinished buildings stand in a scenic spot in Yantai, a city of East China's Shandong Province. Photo: IC

The debt risks faced by local companies are becoming increasingly evident. Recently, debt problems faced by a number of big companies in East China's Shandong Province were revealed by the media. Experts noted that Rome wasn't built in a day; the debts were both a result of company strategy to expand business and that of government push to lend support to the companies so as to boost local economic growth.

Mounting debts are becoming a drag on domestic companies as China's economy gets stuck in a descending phase.

In a research report published on February 28, global short-seller, Emerson Analytics Co, said that China Hongqiao Group Limited, a leading aluminum product manufacturer in Binzhou, East China's Shandong Province, had run up a "huge pile of debts" - 53.9 billion yuan ($7.93 billion) by the end of 2015 - which represented 149 percent of its total equity.

Emerson also accused China Hongqiao of ''committing fraudulent acts", such as under-reporting, and estimated that its real profitability is much lower than it claims.

China Hongqiao later fought back by saying in a filing on the Hong Kong bourse that Emerson's allegations are ''biased and misleading''.

Another Shandong-based enterprise, Qixing Group, was also on the verge of bankruptcy as a result of broken capital chain and a large amount of due bank loans that can't be paid off. According to a report by the 21st Century Business Herald in March, data showed that Qixing's debts to banks amounted to more than 7 billion yuan alone.

Furthermore, in February, Tianxin Group, based in Dongying, Shandong and six of its subordinates, also went into the process of bankruptcy, according to domestic media reports. One of those companies, the Shandong Tian Yuan Copper Industrial Co, had a debt-to-asset ratio of about 180 percent, while Tianxin Group had a debt-to-asset ratio of about 104 percent.

On the condition of anonymity, a former general manager of a large manufacturing company in Jingjiang, East China's Jiangsu Province, told the Global Times that usually a debt-to-asset ratio under 50 percent is considered safe.

Ye Hang, a professor at the College of Economics of Zhejiang University, told the Global Times that what is happening to companies in Shandong is also happening to companies in other parts of China.

"In East China's Zhejiang Province, for example, a lot of companies have gone bankrupt in recent years, but I think the situation in Zhejiang is not as bad as that in Shandong, as the provincial government in Zhejiang didn't give overt support to companies and the industrial structure is more diversified compared with Shandong," he said.

Zhejiang-based Hongjian Group, once on the list of China's Top 500 Private Enterprises, reportedly went bankrupt in the beginning of 2016.

Why borrow so much?

Chinese companies' debt-to-asset ratio reportedly had surged to about 170 percent by the end of 2015, equating to approximately 80 percentage points higher than developed countries on average and 66 percentage points higher than emerging economies. Respective data from 2016 could not be found.

"This is a dangerous situation," Yang Kaisheng, the former Head of the Industrial and Commercial Bank of China, said at a financial forum in July 2016.

According to Ye, both the borrowers (companies) and the lenders (banks and other private loaners) have a sense of propriety regarding how much debt can be safely borrowed, but when the economy was rising, they tended to be off-guard about the so-called alert line and would take for granted that the debts can be repaid.

"The debt problems usually accumulate over a long period and burst out at once," Ye told the Global Times.

The aforementioned former general manger said that when companies are in a process of market expansion, they need a lot of capital, and the only way to get the money is by borrowing.

"A company can also rely on its own income for its business plans, but in that way, it has to expand at a very slow speed, which might cause it to lag behind its competitors," he said.

Dong Dengxin, Director of the Finance and Securities Institute at Wuhan University of Science and Technology, said that it's understandable that companies would borrow money for their main business operation or acquisitions in related industries.  However, many domestic companies would borrow money to invest in high-risk ventures which they are not familiar with at all, or use leverage to try luck in the financial markets with the hope to get quick money when their main business goes under.

"Usually such hopes prove hopeless in the end," Dong continued.

The former general manager said his company had also invested in a gold mine project in Northwest China's Xinjiang Uyghur Autonomous Region with the hope of earning quick money, but the project actually caused heavy losses for the company.

Government intervention

Experts have noted that another reason for the domestic enterprises' mounting debts is overt protection provided by local governments.

In Shandong, for example, financial resources had tilted toward companies in Binzhou and Dongying because the provincial government launched two economic zones at the two cities in 2009.

According to media reports, the local governments set up special funds amounting to 2.8 billion yuan specifically for the zones.

Major banks in Shandong had also increased loans to the economic zones as a response to the government call.

The aforementioned former general manager also said that when his company was first set up in Jingjiang, the local government gave a lot of support such as providing very cheap land and helped to exploit the connection with local banks.

"But those interventions do not all come in good form. For example, when we needed partners in business, they [the local government] always introduced to us someone they knew, and we were sort of forced to choose whoever they recommended," the former general manager said.

Ye said that, as economic growth is still a crucial criterion for political performance evaluation, it's inevitable that governments would put their bets on big local companies, hoping their taxes can boost the local GDP.

"In a normal way, debt problems can be solved if the companies take quick measures, but with support from the government, companies tend to ignore their financial holes and think that the government will always be a safe pillow to fall back on. Governments should let go of any intervention in company operations," he continued.

An employee at the Bank of China in Northeast China's Heilongjiang Province said that banks still prefer big companies over small enterprises for lending money.

"But credit approval has become harder, and our risk appetite is decreasing," she told the Global Times on Thursday.

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